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FOREIGN EXCHANGE: CURRENCY PEGS THREATENED AS POLICY GOALS DIVERGE

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From Denmark to Qatar and Hong Kong, currency pegs around the world are threatening to come unglued following the Swiss National Bank’s surprise move to drop the exchange rate floor of the euro versus the Swiss franc. The sustainability of currency pegs is being hotly debated, although they have provided stability and credibility for many years.

The peg of the Danish krone to the euro has a long history, whereas the euro-Swiss franc floor was a recent introduction, triggered by the euro crisis in 2011, notes Jens Nordvig, currency strategist at investment bank Nomura.

“The Danish peg is intended to be permanent, while the euro–Swiss franc floor was an emergency measure and was never intended to be permanent,” he says. Although the Danish peg is substantially more credible, inflows into the country are very large and will challenge the central bank to keep the krone from appreciating, Nordvig says.

In Qatar, Khalid Al-Khater, director of research and monetary policy at the central bank, says the economies of the oil-rich Arab Gulf states have moved out of step with the United States, they should consider ending currency pegs to the dollar. In a research paper, Al-Khater writes that if the Federal Reserve raises rates later this year, as expected, it will come at a bad time for the Gulf countries, where economic growth is slowing because of lower oil prices.

In Hong Kong last year the Fed’s quantitative easing forced interest rates down and further fueled a soaring property market. Peter Wong, deputy chairman and CEO of HSBC Asia-Pacific, suggested at the time that Hong Kong should consider switching its peg from the dollar to the Chinese renminbi or a basket of currencies, but authorities there have repeatedly rebuffed such calls.